Back to basics in power sector reform

A LOT of ``whole truths and home truths'' about the embattled power sector in the country surfaced and were placed under the spotlight at the fourth Energy Summit organised by the Confederation of Indian Industry - Southern Region (CII - SR) in Chennai recently.

Propositions such as `The beginning of the power sector reform should have been the distribution-end' with a view to transforming the State electricity boards (SEBs) ``from bankruptcy to bankability'' or that fuel choices should be made on the basis of long-term viability and national energy security, indigenous resources and costs and not short-term considerations of bridging the energy gap and offers from foreign players, are indeed too obvious to need reiteration.

But in the present context where issues are often confused - both deliberately and out of ignorance - by various interests, and the battle over the energy sector is coming to a head both inside and outside Parliament, the focus on basics at the Summit was quite timely. So were the in-depth discussions by professionals and businesses in respect of coal and petroleum fuels.Equally importantly, the Summit devoted enough attention to renewable energy and environment which, arguably, will offer the most viable and integrated solution to the issues of poverty, environment, equity and decentralised development, besides national energy security, in the not-so-long term.

Any proactive approach to energy should take into account the promises and problems that the renewables - hydro-electric, particularly mini hydel, solar, wind and biomass - sector poses, the technological, managerial-institutional progress being made in these sectors in various parts of the world including India, and the hidden environmental costs of conventional fossil fuels that will be increasingly exposed by activism at the national and international levels. Presentations on operating projects in the renewables sector and their economies and financing schemes at the national and global levels were eye-openers.

Ministerial and official spokesmen from the Central government emphasised that the target of doubling power generation to two lakh MW in the next decade was not only not based on an exaggeration of demand but was also a prerequisite for an average GDP growth of at least eight per cent to nine per cent. Capacities of such magnitudes (one lakh MW in a decade compared to one lakh MW in the past five decades) cannot be achieved without private investment taking care of at least 50 per cent of new capacity.

Contrast this with the stance of some inveterate optimists (that is how one has to describe them, considering their assumptions about ease of structural reform) who expressed the fear that once electricity boards are restored to health (something that, by all accounts, will take a minimum of five years), captive power capacity will become a costly proposition compared to grid power and hence investment in captive capacity, be it for individual industries or groups of consumers, should be undertaken with great caution.

Some participants from the floor asked, ``Why not improve the public sector, instead of inviting private and foreign capital?'', while some others pointed to improvements effected in recent times in material management and customer service in Tamil Nadu. The moot question, however, is whether SEBs discovering their potential for improvement could at all be delinked from the question of competition coming up on the horizon.

Political and official spokesmen from Tamil Nadu were eloquently silent on what the government intended to do about the SEB restructuring proposals before it by way of the report of international consultants - a silence that is to be seen in the context of the coming election to the State legislature and the tendency at the State level of avoiding an open and transparent debate on policies, options and issues. The fact that the State has not appointed a Chairman to the Regulatory Commission two years after accepting the policy of having ERCs was not even mentioned by experts at the meeting - again the manifestation of a tendency to avoid debate and open criticism of powers-that-be.

An indication of how strongly the SEB system will resist reform is given by its consistent refusal, in most States - including Tamil Nadu - to allow sale of power to third parties even by the private producers in the renewable energy sector, despite the fact that renewables (excluding mega hydel into which private capital is unlikely to enter) form a minuscule part of total capacity (1,756 MW out of one lakh MW or 1.76 per cent, most of the former being in the wind sector).

Electricity Bill 2000

Fear of ``cherry picking'' by the private sector (otherwise known as privatising profitable markets and nationalising loss-inducing markets), when extended to renewables, is surely unwarranted. It only betrays a total lack of self-confidence on the part of the SEBs induced by their present weak balance-sheets and not based on their genuine potential as mega players once reforms make adequate progress.

Officials and experts pointed out some salient features of the Electricity Bill 2000 (which have been distorted by opponents of reform). The Bill (yet to take a final shape) only abolishes the mandatory requirement of having an SEB but does not compel States which want to continue with the SEB system in their present structure to do so. It says State governments may direct the State Electricity Reforms Commissions to provide for subsidy in the tariff payable, on condition that the government bears the subsidy in the manner specified and there is financial appropriation by the State legislature.

It mandates 100 per cent metering in three years. (Which genuine spokesman of State autonomy could oppose a provision like this which would prevent fleecing of a State undertaking by unscrupulous consumers, especially the rich?) The State Commission cannot decide tariff where it is decided by the Union government. The Bill also seeks to encourage a trading mechanism to create a market in electricity.

Despite the surface unity among opponents of power sector reform across the country, it is clear that resistance to reform is directly proportional to the level of economic development of a State. States such as Tamil Nadu which have built a well- developed infrastructure and institutional system in the early decades of planning, whose system deterioration is mainly a result of the inherent evils of monopoly and political populism and where the EB system has developed a strong constituency with a vested interest in it, are more resistant to reform.

Resistance will be less in States that have remained relatively backward and where, by the time the reforms came, Central planning and devolution of funds from the Centre, compared to the requirement, had weakened substantially. As several experts pointed out, the testing times for reform will be in the initial years when tariffs go up (in fact they have substantially gone up in reforming States like Andhra Pradesh and Orissa in the post- reform period), before going down (in terms of constant prices) after competition and streamlined systems settle in and capital costs are recovered.

The tendency on the part of anti-reform lobbies to compare the production cost of new plants in the private sector with the overall production cost of SEBs is irrational but is rarely countered. Even at the Energy Summit, nothing was said to counter this (or for that matter many misleading points raised by opponents of reforms, particularly trade unions). New capacities to be put up by SEBs (assuming they have enough surpluses to invest in new capacities to meet ever rising demand from the industrial, agricultural and domestic sectors) are unlikely to be vastly different assuming the fuels are the same.

What is more, opponents of any change in power sector management even compare the cost of subsidised power from SEBs to the price charged by IPPs to purchasing SEBs. Not only the cost of power subsidy to the exchequer is left out of such reckoning, but more deplorably, the argument is blind to the fact that ``subsidies'' are often either targeted at the non-poor, or are simply passed back to the economy through high budget deficits, inflation and low economic growth and employment, which affect the poorest the most, making them pay the cost of the ``subsidies''. Also, confusion is created by comparing the 16 per cent return on `equity' guaranteed to private investors to initially attract them and get some ``success stories'' with three per cent minimum return on ``net fixed assets'' for SEBs prescribed under law.

After dabbling with payment ``security mechanisms'' such as escrow accounts and securitisation to guarantee private promoters in generation, the community of power generators and consumers as also policy-makers - and also multilateral institutions and India's leading trade partners - are coming to rely on financial incentives and assistance to encourage States and SEBs to undertake restructuring. This also seems to be a case of topsy- turvy priorities. Such an approach should have been adopted at the beginning of the reform process. Now, the Power Finance Corporation, Indian financial institutions, World Bank, Asian Development Bank and other agencies are operating special financial windows to facilitate restructuring and reform of the power sector.

Also, as was pointed out at the Summit, there is by and large a political consensus for SEBs reform, though not in favour of any single model for all States, despite the shrill protests emanating from the compulsions of competitive politics. This is a good sign of democratic assimilation of issues and tasks. For instance, it was pointed out, West Bengal has decided to segregate the rural electrification sector needing State funding support, while turning the other wings of the power sector into profit centres without privatising or corporatising them. Similarly, Kerala has gone in for a slightly different model with international cooperation.

But believe it or not, the most encouraging sign has come from a very important section of ``stakeholders'' in the power sector - labour - if only one cares to see it. ``SEBs have been driven to bankruptcy by populist policies of governments''. This is a pronouncement from the memorandum submitted to the Prime Minister on August 9, by the National Coordination Committee of Electricity Employees and Engineers, which is now embarked on an agitation programme against the Electricity Bill 2000, especially its provision for removing the monopoly control of SEBs over the power sector.

Even while expressing fears (reflecting Left perceptions) that power sector reform was being used to ``sell national assets'' cheaply to private and foreign capital, the memorandum calls for ``enforcing corrective measures and fiscal discipline'' among SEBs, implementation of the mandate to earn minimum three per cent return on fixed assets, compulsory enforcement of metering and compensating SEBs fully for free or concessional power supplied at the behest of the State governments.

Thus it is clear that power sector reform can make progress in a stable manner only if the legitimate concerns of the labour force as a leading ``stakeholder'' (including the unstated issues about job losses) are addressed. How this is handled will depend on the predilections of policy-makers, at both the political and administrative levels.

In the political spectrum, at one end is the strategy of pushing ahead with power sector reforms (or for that matter any aspect of economic reform) by whipping up ultra-nationalism and communal chauvinism as a means to legitimise authoritarian social and political management. At the other end are those who, while mouthing anti-imperialist rhetoric, would resist any reform, not knowing that this would only land the power economy in a situation where the only players ``willing and able'' to take the plunge will be international finance capital!

How industry and business react in this scenario and whether they will take proactive steps on their own in a farsighted manner are multi-million-dollar questions.

R. Gopalakrishnan

in Chennai

Send this article to Friends by E-Mail

Section  : Business
Previous : Daewoo Anchor to launch thinking fridge
Next     : In a class of their own - II